Public Advisory GroupSpecial Session

on Analysis for 2018 IRPSeptember 22, 2017

Presented by PAG Participants Merrie Lee Soules and Don Kurtz

Agenda

1) Summary of PRC requirements for the Integrated Resource Plan2) Discussion of the current energy environment3) Strategic Implications4) Defining “equivalent” and “minimize environmental impacts”5) Assumptions that feed the Loads & Resources Table

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Summary of PRC requirements for the Integrated Resource Plan

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From the Rule onIntegrated Resource Plans for Electric Utilities

1) The purpose of the IRP process is “…to identify the most cost effective portfolio of resources to supply the energy needs of customers.” (17.7.3.7)

2) “most cost effective resource portfolio means those supply-side resources and demand-side resources that minimize the net present value of revenue requirements proposed by the utility to meet electric system demand during the planning period consistent with reliability and risk considerations” (17.7.3.7)

3) “For resources whose costs and service quality are equivalent, the utility should prefer resources that minimize environmental impacts.” (17.7.3.7)

4) In addition to the detailed description of what the utility determines to be the most cost-effective resource portfolio, “…the utility shall develop a reasonable number of alternative portfolios by altering risk assumptions and other parameters developed by the utility and the public advisory process.” (17.7.3.9)

5) In addition, (17.7.3.9) the utility is required to provide a summary of how “existing and anticipated environmental laws and regulations” were “considered in, or affected, the development of resource portfolios.”

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Discussion of the Current Energy Environment

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The Current Dynamic Energy Environment

1) Plummeting costs for renewable energyA. 85% reduction in the cost for utility scale solar over the last 7 yearsB. 66% reduction in the cost for wind for same period

(Source: Lazard’s Levelized Cost of Energy – 10.0)

2) Steadily increasing preference for distributed solar options by individual ratepayers: commercial, residential, and government

A. Historical growth in interconnected capacity has been exponentialB. Costs are forecast to continue to decrease, while fuel costs are expected to increaseC. Storage will be a viable option for all distributed users

3) Rapid emergence of storage options for both utility and consumer-scale useA. Rapidly improving technologiesB. Rapidly decreasing costs

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The Current Dynamic Energy Environment (cont.)

4) Clear impact of energy efficiency and demand response on reducing resource needs

Using modeling to test how well different resources would perform under a wide range of future conditions, energy efficiency consistently proved the least expensive and least economically risky resource. In more than 90 percent of future conditions, cost-effective efficiency met all electricity load growth through 2030 and in more than half of the futures all load growth for the next 20 years. It’s not only the single largest contributor to meeting the region’s future electricity needs; it’s also the single largest source of new peaking capacity. (page 1-1)

(Source: Executive Summary, Northwest Power and Conservation Council Seventh Northwest Power Plan, adopted February, 2016.https://www.nwcouncil.org/energy/powerplan/7/plan/)

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The Current Dynamic Energy Environment (cont.)

5) Inevitability of future limitations on carbon emissionsA. Federal or state regulationB. Regulatory rulemakingC. Judicial decisions

6) Real concern about stranded assets that might become the responsibility of utility ratepayers

7) Increased pressure for regulatory reform, including movement toward competitive energy market models

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Strategic Implications

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Strategic Implications of this Dynamic Context for the IRP

1) The importance of addressing carbon emissions in all future planning2) Understand the value of buying time to let new supply side technologies

emergeA. Stop all investments in new fossil fuel power plants

i. Fossil fuel power plants are the riskiest and least cost effective way to address load management

ii. They are expensive, have long use and payback periods, are carbon intensive, are subject to fuel cost volatility, and face danger of rapid obsolescence

B. Keep current generating facilities in active service instead of retiring them and replacing them with new fossil fuel generating facilities

C. Invest in lowering peak demand throughi. Energy efficiencyii. Demand responseiii. Utilizing power purchase agreements during peak periodsiv. Investing in non-wire and other alternatives for distribution and transmission

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Sources: EPE figures from Written Question responses from 8-8-17: https://www.epelectric.com/files/html/Written_Questions_for_8-8-17_meeting.pdf

Northwest Power and Conservation Council figures supplied by Tom Karier, NWPCC commissioner in email of March 10, 2016

EPE Peak MW

Percent change

NWPCC Winter

Peak MWPercent change

NWPCC Summer Peak MW

Percent change

2017 1792 29736 267672018 1889 5.41 29696 -0.13 26781 0.052019 1906 0.90 29426 -0.91 26657 -0.462020 1922 0.84 29087 -1.15 26489 -0.632021 1945 1.20 28732 -1.22 26311 -0.672022 1968 1.18 28361 -1.29 26138 -0.662023 1991 1.17 27982 -1.34 25977 -0.622024 2010 0.95 27604 -1.35 25833 -0.552025 2041 1.54 27225 -1.37 25723 -0.432026 2066 1.22 26865 -1.32 25633 -0.352027 2093 1.31 26531 -1.24 25586 -0.182028 2118 1.19 26225 -1.15 25586 0.002029 2154 1.70 26003 -0.85 25722 0.532030 2187 1.53 25991 -0.05 25983 1.012031 2220 1.51 26126 0.52 26249 1.022032 2247 1.22 26314 0.72 26572 1.232033 2289 1.87 26516 0.77 26912 1.282034 2325 1.57 26728 0.80 27261 1.302035 2363 1.63 26948 0.82 27633 1.36

Average annual % Change 1.77 -0.52 0.18

Total Change 31.86 -9.38 3.24

A Comparison of Peak Demand Projections for El Paso Electric and the Northwest Power and Conservation Council (NWPCC)

Strategic Implications of this Dynamic Context for the IRP (cont.)

3) Recognize the clear advantage of utilizing energy efficiency and demand response for satisfying projected resource needs

4) Invest in renewable energy if new generation is neededA. Lower cost, less risk no fuel costs, less cost volatility, low environmental impact, no carbon

emissionsB. Storage is already viable for round-the-clock renewable sufficiency

5) Factor in a sufficiently high risk premium for long-term, high-capital investments, specifically the cost to ratepayers for

A. Emergence of much cheaper technologies over the facilities’ projected use periodB. Higher than projected fuel costsC. High probability of carbon regulation and pricing requirementsD. Possibility of early obsolescence leading to stranded assets

6) The serious challenge posed by current energy environment to EPE’s customary way of doing business, and to the future of the regulatory process itself

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Defining “equivalent” and“minimize environmental impacts”

These definitions are critical to how various outputs of the analysis are considered

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Definition of “Equivalent”1) 17.7.3.6 OBJECTIVE: The purpose of this rule is to set forth the commission’s requirements for the

preparation, filing, review and acceptance of integrated resource plans by public utilities supplying electric service in New Mexico in order to identify the most cost effective portfolio of resources to supply the energy needs of customers. For resources whose costs and service quality are equivalent, the utility should prefer resources that minimize environmental impacts.

2) ExamplesA. +/- 2-3% - used by the study “Estimating the Economically Optimal Planning

Reserve Margin” prepared for EPE by Energy Environmental Economics and submitted May 2015

B. +/- 14% and increasing is the range used by George Novela regarding Demand forecast (from George Novela information pg 88-89)

C. -5.08% to +2.29% was the range of forecast accuracy reported by George Novela in 2014 (see presentation pg 30)

3) Proposal - Use +/- 3% as the range for “equivalent”

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Definition of “minimize environmental impacts”

1) 17.7.3.6 OBJECTIVE: The purpose of this rule is to set forth the commission’s requirements for the preparation, filing, review and acceptance of integrated resource plans by public utilities supplying electric service in New Mexico in order to identify the most cost effective portfolio of resources to supply the energy needs of customers. For resources whose costs and service quality are equivalent, the utility should prefer resources that minimize environmental impacts.

2) Energy Efficiency and Demand Management have no environmental impacts3) Solar, Wind, Geothermal, and some Storage resources have minimal

environmental impacts4) Biomass and Gas Fired Generation resources have more environmental impacts

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Assumptions that Feed the Loads & Resources Table

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From the Rule onIntegrated Resource Plans for Electric Utilities 1) “Topics to be discussed as part of the public participation process

include, but are not limited to,A. The utility’s load forecast;B. Evaluation of existing supply- and demand-side resources;C. The assessment of need for additional resources;D. Identification of resource options;E. Modeling and risk assumptions and the cost and general attributes of

potential additional resources;F. Development of the most cost-effective portfolio of resources for the

utility’s IRP.” (17.7.3.9)

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Base Loads & Resources Table

1) The L&R Table contains the base assumptions for the modeling analysis2) The Base Assumption is “If nothing changes…”

A. Evaluation of existing supply- and demand-side resourcesB. The utility’s load forecastC. The assessment of need for additional resources

3) There seem to be problems with the L&R TableA. Not all existing supply side resources includedB. Math calculations in the Purchased Energy sectionC. Calculation of the forecast for Native System DemandD. Assumptions for growth in Distributed GenerationE. Assumptions for growth in Energy EfficiencyF. Others?

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Resources Section – Assume no changes from current state unless contractual

1) Total Generation Resources = 2131 MW throughout the planning periodA. Include Rio Grande 6 (46MW)

i. RG 6 was placed in “Inactive Reserve” status in March of 2015 and removed from the L&R Tableii. RG 6 was in operation on the peak day of 2015 and 2016.iii. RG 6 has been operational in 2017.iv. RG 6 is being utilized as an available resource

B. Do not assume retirement of Rio Grande 7 (46MW) at the end of 2022C. Do not assume retirement of Newman 1 (74MW) and Newman 2 (76MW) at the end of 2022D. Do not assume retirement of Newman 3 (97MW) and Newman 4 (227 MW) at the end of 2026E. Do not assume retirement of Copper (64MW) at the end of 2030F. Do not assume retirement of Rio Grande 8 (142MW) at the end of 2033

2) Process for evaluating Retirements to be discussed at the October 26 meeting3) Total Resource Purchases modified slightly to reflect math corrections – e.g.72 MW in

2024A. Forecasted Solar Degradation was represented as being per the Purchased Power Agreement

contracts

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Changes to System Demand Forecast

1) Add a line 4.45 Native System Peak DemandA. This becomes the actual demand served by the system

2) Add a column for 2017A. Clarify the actual starting point for the forecasted assumptions

3) Start with 2017 Actual Peak Native System DemandA. 1935 MW on June 22, 2017B. This would have included the effects of

i. Distributed Generation (DG)ii. Energy Efficiency (EE)iii. Line Losses (LL)

4) Add back the effects in 2017 of DG (33MW) and EE (10MW) and LL (4MW) to get 2017 Native System Demand

A. 1982 MW for 20175) Forecast future Native System Demand (Line 4.1) using George Novela’s factors from

pg 39

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Demand Forecast Assumptions

Year

Native System Peak Demand

(MW)

Native System Demand (Line 4.1 in

MW)Growth (in %)

2017 1935 19822018 2002 0.992019 2019 0.882020 2035 0.782021 2059 1.182022 2082 1.112023 2106 1.172024 2126 0.942025 2158 1.492026 2183 1.172027 2205 1.002028 2227 1.002029 2249 1.002030 2272 1.002031 2294 1.002032 2317 1.002033 2340 1.002034 2364 1.002035 2387 1.002036 2411 1.002037 2435 1.00

1) 1935 MW was 2017 actual peak demand on June 22, 2017

2) 2017 Native System Demand (Line 4.1) = 1935 MW + 33MW DG + 10 MW EE +4 MW LL = 1982 MW

3) Forecasted percentage growth is from George Novela’s material pg 39

4) Native System Demand thereafter is calculated as increasing by the forecasted percentage growth

5) This Forecast of Native System Demand is applied in the new L&R Table

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Changes to Distributed Generation Forecast

1) The growth in Distributed Generation Interconnected Capacity has been exponentialA. On average, the growth has been over 97% year over yearB. Using only the most modest increases, the growth has been over 40% year

over year

2) The current L&R Table assumes an unrealistic constant increase of only 3MW per year

3) A more realistic forecast of DG growth is required4) If there are issues or constraints regarding significant growth in DG

they should be addressed

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Distributed Generation Forecast Assumptions

0

10000

20000

30000

40000

50000

60000

70000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Distributed Generation Interconnected Capacity (kW ac)

1) Data from the Distributed Generation chart on pg 35

2) Not including the increase from 2008 to 2009, average increase is over 95% each year.

3) Using only the 4 most modest years, the average annual increase is over 41%

Year

Cumulative Interconnected Capacity (kWac) Percent Increase

2008 57 616%2009 408 182%2010 1152 151%2011 2886 142%2012 6991 56% 96.25%2013 10881 27%2014 13822 44% 41.25%2015 19924 38%2016 27588 130%2017 63554

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Distributed Generation Forecast (Unrealistic)

1) 2016 and 2017 from L&R Table in 2015 IRP submission

2) 2018 forward is from the L&R Table pg 37

0

10

20

30

40

50

60

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Distributed Generation Forecast (MW)

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YearDistributed

Generation (MW) Percent Increase2016 19 16%2017 22 50%2018 33 6%2019 35 9%2020 38 5%2021 40 8%2022 43 5%2023 45 4%2024 47 6%2025 50 4%2026 52 6%2027 55

Realistic Distributed Generation Forecast

YearDistributed Generation

(MW) Percent Increase

2016

2017

2018 63 40%

2019 88 40%

2020 123 40%

2021 173 40%

2022 242 40%

2023 339 40%

2024 474 40%

2025 664 40%

2026 930 40%

2027 1302

25

0

200

400

600

800

1000

1200

1400

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Distributed Generation Increasing by 40% per Year (MW)

Distributed Generation Forecast to be used in the L&R Table

1) 63 MW is the anticipated interconnected capacity at the end of 2017

2) Assume a 40% increase reduced by 5% each year until 2023. Then assume 38 MW additional each year thereafter.

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YearDistributed

Generation (MW) Percent Increase201620172018 63 40%2019 88 35%2020 119 30%2021 155 25%2022 193 20%2023 231 16%2024 269 14%2025 307 12%2026 345 11%2027 383

0

100

200

300

400

500

600

700

800

Distributed Generation Forecast (MW)

Energy Efficiency Forecast

Year

Current L&R Table Energy Efficiency Forecast (MW)

Energy Efficiency Forecast in EPE System Expansion Plan 2018-2027 (MW)

New Energy Efficiency Forecast in Revised L&R Table (MW)

2017 102018 10 16.8 172019 14 21.5 222020 19 26.8 272021 24 32.2 322022 29 37.6 382023 34 43 432024 39 48.3 482025 43 53.7 542026 48 53.7 592027 53 53.7 642028 57 692029 63 742030 67 792031 72 842032 77 892033 82 942034 87 992035 92 1042036 96 109

1) The Energy Efficiency Forecast in EPE’s System Expansion Plan for 2018-2027, Table 1, shows a greater impact from energy efficiency than the current L&R Table.

2) The forecasts in both the System Expansion Plan and the L&R Table increase by ~5MW/yr

3) The new forecast uses the System Expansion Plan values (rounded) and an annual increase of 5MW/yr after 2025

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28This Material and Information is the Work Product of the Public Advisory Group Presented by Merrie Lee Soules and Don Kurtz. This is not an El Paso Electric Company Work Product.

Conclusions1) There is no looming capacity shortage2) There are challenges with this L&R Table

A. How to evaluate and justify retirement opportunities? (Hold until after the October 26 meeting?)

B. What are the implications of the growth in Distributed Generation?C. How does Energy Storage fit into the forecast?

3) EPE’s generating fleet is aging and there needs to be a plan for retirementsA. Renewable resources including energy storage, energy efficiency, and demand response

should be put in place to enable retirements when they are needed and justifiedB. Retirements should not be replaced with fossil fuel based generation but only with

resources that minimize environmental impacts

4) Given the significantly different picture painted by this L&R Table, how assure regulators and the public that true, reasonable, responsible values are being assumed?

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